ECON 3303 Money and Banking Exam 2 Summer MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

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1 ECON 3303 Money and Banking Exam 2 Summer 2017 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) If gold becomes acceptable as a medium of exchange, the demand for gold will and the demand for bonds will, everything else held constant. A) decrease; decrease B) increase; decrease C) increase; increase D) decrease; increase 1) 2) If brokerage commissions on stocks fall, everything else held constant, the demand for bonds, the price of bonds, and the interest rate. A) decreases; decreases; decreases B) increases; increases; increases C) decreases; decreases; increases D) increases; decreases; increases 2) 3) Holding everything else constant, if interest rates are expected to increase, the demand for bonds and the demand curve shifts. A) decreases; left B) increases; left C) increases; right D) decreases; right 3) 4) Pieces of property that serve as a store of value are called A) assets. B) liabilities. C) borrowings. D) units of account. 4) 5) Of the four effects on interest rates from an increase in the money supply, the initial effect is, generally, the A) income effect. B) liquidity effect. C) expected inflation effect. D) price level effect. 5) 6) The sum of the current yield and the rate of capital gain is called the A) par value. B) rate of return. C) discount yield. D) pertuity yield. 6) 7) The is the final amount that will be paid to the holder of a coupon bond. A) coupon value B) discount value C) face value D) present value 7) 8) All of the following are examples of coupon bonds except A) U.S. Treasury notes. B) U.S. Treasury bonds. C) Corporate bonds. D) U.S. Treasury bills. 8) 9) in the money supply creates excess demand for, causing interest rates to, everything else held constant. A) A decrease; bonds; rise B) An increase; bonds; fall C) An increase; money; rise D) A decrease; money; fall 9) 10) When the price of a bond is above the equilibrium price, there is an excess bonds and price will. A) demand for; fall B) supply of; rise C) supply of; fall D) demand for; rise 10) 1

2 11) Everything else held constant, when stock prices become less volatile, the demand curve for bonds shifts to the and the interest rate. A) right; falls B) left; rises C) left; falls D) right; rises 11) 12) In a business cycle expansion, the of bonds increases and the curve shifts to the as business investments are expected to be more profitable. A) supply; supply; right B) demand; demand; left C) demand; demand; right D) supply; supply; left 12) 13) If stock prices are expected to drop dramatically, then, other things equal, the demand for stocks will and that of Treasury bills will. A) decrease; decrease B) decrease; increase C) increase; increase D) increase; decrease 13) 14) Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to maturity of 15 percent. If the interest rate on one-year bonds rises from 15 percent to 20 percent over the course of the year, what is the yearly return on the bond you are holding? A) 5 percent B) 10 percent C) 15 percent D) 20 percent 14) 15) The interest rate that describes how well a lender has done in real terms after the fact is called the A) ex ante nominal interest rate. B) ex post real interest rate. C) ex post nominal interest rate. D) ex ante real interest rate. 15) 16) When the interest rate on a bond is the equilibrium interest rate, in the bond market there is excess and the interest rate will. A) above; supply; rise B) above; demand; fall C) below; supply; fall D) above; demand; rise 16) 17) A lower level of income causes the demand for money to and the interest rate to, everything else held constant. A) increase; decrease B) increase; increase C) decrease; decrease D) decrease; increase 17) 18) In Keynesʹs liquidity preference framework, if there is excess demand for money, there is A) an excess supply of bonds. B) an excess demand for bonds. C) equilibrium in the bond market. D) too much money. 18) 19) The concept of is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today. A) interest B) present value C) deflation D) future value 19) 20) An increase in an assetʹs expected return relative to that of an alternative asset, holding everything else constant, the quantity demanded of the asset. A) increases B) erases C) decreases D) has no effect on 20) 2

3 21) The yield to maturity is than the rate when the bond price is its face value. A) greater; coupon; below B) greater; coupon; above C) less; perpetuity; below D) greater; perpetuity; above 21) 22) When the economy slips into a recession, normally the demand for bonds, the supply of bonds, and the interest rate, everything else held constant. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises 22) 23) When the inflation rate is expected to increase, the for bonds falls, while the curve shifts to the right, everything else held constant. A) supply; supply B) demand; demand C) demand; supply D) supply; demand 23) 24) Factors that can cause the supply curve for bonds to shift to the right include A) an expansion in overall economic activity. B) a decrease in expected inflation. C) a decrease in government deficits. D) a business cycle recession. 24) 25) If the interest rate on a bond is above the equilibrium interest rate, there is an excess for bonds and the bond price will. A) supply; fall B) demand; rise C) supply; rise D) demand; fall 25) 26) If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is A) -3 percent. B) -2 percent. C) 3 percent. D) 7 percent. 26) 27) If people expect real estate prices to increase significantly, the curve for bonds will shift to the, everything else held constant. A) demand; right B) supply; right C) supply; left D) demand; left 27) 28) When the Fed decreases the money stock, the money supply curve shifts to the and the interest rate, everything else held constant. A) right; falls B) left; rises C) right; rises D) left; falls 28) 29) The opportunity cost of holding money is A) the price level. B) the interest rate. C) the discount rate. D) the level of income. 29) 30) The present value of an expected future payment as the interest rate increases. A) rises B) falls C) is unaffected D) is constant 30) 3

4 31) If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is slow, then the A) interest rate will fall. B) interest rate will rise. C) interest rate will initially fall but eventually climb above the initial level in response to an increase in money growth. D) interest rate will initially rise but eventually fall below the initial level in response to an increase in money growth. 31) 32) If there is an excess supply of money A) individuals sell bonds, causing the interest rate to rise. B) individuals sell bonds, causing the interest rate to fall. C) individuals buy bonds, causing interest rates to rise. D) individuals buy bonds, causing interest rates to fall. 32) 33) A coupon bond that has no maturity date and no repayment of principal is called a A) consol. B) cabinet. C) Treasury note. D) Treasury bill. 33) 34) Everything else held constant, when bonds become less widely traded, and as a consequence the market becomes less liquid, the demand curve for bonds shifts to the and the interest rate. A) left; rises B) right; falls C) right; rises D) left; falls 34) 35) In the figure above, a factor that could cause the demand for bonds to decrease (shift to the left) is: A) an increase in wealth. B) an increase in the expected return on bonds relative to other assets. C) a reduction in the riskiness of bonds relative to other assets. D) a decrease in the expected return on bonds relative to other assets. 35) 36) The riskiness of an assetʹs returns due to changes in interest rates is A) exchange-rate risk. B) asset risk. C) interest-rate risk. D) price risk. 36) 4

5 37) Everything else held constant, when households save less, wealth and the demand for bonds and the bond demand curve shifts. A) decrease; left B) increase; right C) decrease; right D) increase; left 37) 38) When rare coin prices become volatile, the curve for bonds shifts to the, everything else held constant. A) supply; right B) supply; left C) demand; right D) demand; left 38) 39) Everything else held constant, if the expected return on U.S. Treasury bonds falls from 8 to 7 percent and the expected return on corporate bonds falls from 10 to 8 percent, then the expected return of corporate bonds relative to U.S. Treasury bonds and the demand for corporate bonds. A) falls; rises B) falls; falls C) rises; rises D) rises; falls 39) 40) A movement along the bond demand or supply curve occurs when changes. A) bond price B) expected return C) wealth D) income 40) 41) The is calculated by multiplying the coupon rate times the par value of the bond. A) present value B) coupon payment C) maturity payment D) par value 41) 42) Everything else held constant, an increase in the riskiness of bonds relative to alternative assets causes the demand for bonds to and the demand curve to shift to the. A) rise; right B) fall; left C) rise; left D) fall; right 42) 43) The interest rate is adjusted for expected changes in the price level. A) ex ante real B) ex post real C) ex post nominal D) ex ante nominal 43) 44) In which of the following situations would you prefer to be the borrower? A) The interest rate is 4 percent and the expected inflation rate is 1 percent. B) The interest rate is 13 percent and the expected inflation rate is 15 percent. C) The interest rate is 9 percent and the expected inflation rate is 7 percent. D) The interest rate is 25 percent and the expected inflation rate is 50 percent. 44) 45) Deflation causes the demand for bonds to, the supply of bonds to, and bond prices to, everything else held constant. A) decrease; increase; increase B) increase; decrease; increase C) decrease; decrease; increase D) increase; increase; increase 45) 46) With an interest rate of 6 percent, the present value of $100 next year is approximately A) $106. B) $100. C) $94. D) $92. 46) 5

6 47) In the figure above, the price of bonds would fall from P2 to P1 if A) inflation is expected to increase in the future. B) there is a business cycle expansion. C) there is a business cycle recession. D) inflation is expected to decrease in the future. 47) 48) A pays the owner a fixed coupon payment every year until the maturity date, when the value is repaid. A) discount bond; discount B) coupon bond; discount C) coupon bond; face D) discount bond; face 48) 49) When the interest rate changes, A) the supply curve for bonds shifts to the right. B) it is because either the demand or the supply curve has shifted. C) the demand curve for bonds shifts to the left. D) the demand curve for bonds shifts to the right. 49) 50) If brokerage commissions on bond sales decrease, then, other things equal, the demand for bonds will and the demand for real estate will. A) decrease; decrease B) increase; increase C) decrease; increase D) increase; decrease 50) 6

7 Answer Key Testname: ECON3303_EXAM2_SUMMER_2017 1) B 2) C 3) A 4) A 5) B 6) B 7) C 8) D 9) B 10) C 11) B 12) A 13) B 14) C 15) B 16) B 17) C 18) A 19) B 20) A 21) A 22) B 23) C 24) A 25) B 26) C 27) D 28) B 29) B 30) B 31) C 32) D 33) A 34) A 35) D 36) C 37) A 38) C 39) B 40) A 41) B 42) B 43) A 44) D 45) B 46) C 47) B 48) C 7

8 Answer Key Testname: ECON3303_EXAM2_SUMMER_ ) B 50) D 8